News & Analysis


The loonie rose half a percent against the greenback on Wednesday, following a market-wide positive shift in risk sentiment. Nevertheless, CAD’s gains lagged many of its peer currencies in the G10 space, owing potentially to the limited sell-off in the loonie during risk-off periods over previous weeks. The improvement in risk resulted in Canadian yields rising, but by less than corresponding US yields. The substantial 12% drop in WTI, as well as the smaller yet still significant decline in base metals prices, were insufficient to pull CAD price action into negative territory, though they are likely to have factored into CAD’s relative underperformance against peers. Looking at today’s session, markets will focus on Bloomberg’s economic survey for March at 15:00 GMT.


The DXY index – a gauge of USD strength – posted its largest decline in sixteen months as investors’ risk appetite improved following headlines from Ukraine that raised hopes around peace talks. Markets are optimistic around the prospect of diplomacy between Russia and Ukraine as Ukraine’s top foreign policy aide stated Ukraine is open to discussing Russia’s demand for neutrality. A de-escalation still is a long way off as it seems unlikely at the moment that Ukraine will accept Russia’s demands for gaining territory over Crimea and having the Donbas region recognised as independent – Volodymyr Zelensky stated both sides must compromise. On this, focus will be on the meeting of Russian and Ukranian foreign ministers in Turkey today as bullish investors gauge whether their optimism over peace talks yesterday was misplaced. Beyond geopolitics, markets will focus on US CPI today at 13:30 GMT, which is the last inflation print before next week’s FOMC policy decision. CPI in February is set to show an increase of 7.9% YoY, according to the median of forecasts submitted to Bloomberg. Inflation has been broadening in all categories, and this is likely to extend although the Russia-Ukraine war is likely to have delayed the inflation peak. A high print is unlikely to see market pricing of a 50bps rate hike next week return, as the geopolitical uncertainties meant expectations of anything over 25bps faded over the last weeks. At the same time, a lower than expected reading is unlikely to change the Fed’s view that a rate hike in March is appropriate, although market pricing for the next months’ worth of meetings will likely ease.


EURUSD extended gains yesterday and traded at fresh weekly highs, due to both a broad retracement in the dollar and a sharp rally in the euro due to the improved growth outlook: GBPEUR similarly fell close to one-month lows even though the pound performed fairly well across the board. The reversal in risk sentiment came as Ukraine said to be open to discussing Russia’s demand for neutrality as long as it’s given security guarantees – although it won’t surrender a “single inch of territory”, President Zelenskiy’s foreign policy aide stated. The comment from the foreign policy aide relates to Russia’s demand for Crimea to be acknowledged as Russian, and for the separatist regions in eastern Ukrainian region of Donbas to be acknowledged as independent. While it doesn’t look like Russia’s demands are going to be met at this stage, Volodymyr Zelenskiy’s call for direct negotiations with Vladimir Putin gives markets a glimmer of hope that a de-escalation is more likely than a substantive escalation. Outside of Russia-Ukraine, markets will focus on today’s European Central Bank decision. At this stage, we deem it too early for the ECB to take a definitive stance on monetary policy, given the uncertain geopolitical outlook. Instead, we expect the Governing Council to stick to their current path for now while highlighting the central bank is flexible enough to adjust policy accordingly if matters shift to either direction. Energy will be a main talking point for the ECB today, and the central bank’s view on how much energy prices will filter through to broader consumer prices will be key for the euro. In the background, headlines from Versailles may catch markets’ eyes as EU leaders start discussions today on a plan to jointly issue bonds to finance energy and defense spending as a response to the fallout from the war. Given the headlines of such policies helped the euro rise from the doldrums earlier this week, markets will focus on the viability of further supranational spending and the likelihood that it will be derailed by political discrepancies.


Amid the broader risk-on move, the pound rose along with other pro-cyclical currencies yesterday to notch gains of 0.65% on the day against the dollar. Given the pound has been somewhat sheltered by the risk-off rout driven by the war in Ukraine and concerns around European growth risks, sterling’s recovery yesterday lagged currencies that have been more to these dynamics i.e. EUR, NOK and SEK. The stronger rebound in the euro dragged GBPEUR down from post-referendum highs and back towards levels last seen a month ago. This morning, the pair edged slightly higher after three days of continued lows, as traders position themselves ahead of the ECB policy meeting today. Domestically, pressure on Chancellor Rishi Sunak rose when former prime minister David Cameron called him to “keep the cost of government down” while also cutting taxes as the Chancellor scrambles to offset the surges in energy bills sparked by sanctions on Russia.



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